Why Retirement Account Balances Can Vary So Much

On this episode of The Long View, Joel Dickson, global head of enterprise advice methodology for Vanguard, talks retirement plans, auto-enrollment, and investment decision-making.

Here are a few excerpts from Dickson’s conversation with Morningstar’s Christine Benz and guest host Amy Arnott:

Retirement Plan Decision-Making

Amy Arnott: So, we’d like to switch gears again and talk a little bit more about investment choices and the choices that plan participants are making within the plan. You mentioned earlier that you’re seeing fewer cases of extreme equity allocations where people have either 0% of their assets in equity or 100%, and one of the most striking visuals in the whole study is a chart where you group participants by age and then show their average equity stake as of four different points in time—2005, 2010, 2015, and 2022. Can you expand on what story does that chart tell and what makes it important?

Joel Dickson: So, this in many ways is a great example of the impact of the auto-enrollment and the use of a balanced age-appropriate asset-allocation fund for the default options, because what looks now today on that chart, for those that—I know everyone has the report in front of them, but it’s figure 84—that chart looks a lot like a typical target-date fund glide path. Higher equity allocation when younger, trending down over time to where you get, by the time you’re in early retirement, probably about 50% equity exposure. What’s interesting, though, is that where we’ve seen the change in equity allocation over the course of the last, say, decade and a half has been almost all within those participants 50 years older or less, and in particular those 35 years older or less, where you look at, say, 2006-07 and that group of 35-year-olds or younger were in the, say, 65% to 70% equity range, really not that much different than somebody in their late 50s, early 60s at that point in time. So, a 30-year, if you will, flat asset-allocation profile in many ways.

What you see today is those that are 35 years or younger have equity allocations that are right around 90% and for somebody that has the capacity of time, we would say that that is a more appropriate allocation as you think about long-term retirement savings and having exposure to risk premia, in this case equity-risk premia, that can at least expected to—not guaranteed but expected to—augment your contributions in terms of building wealth. One of the things that comes up is when you think about long-term goals, say you’re saving something for 30 years, on a 30-year basis, investment returns are certainly important, but contribution rates are also about equally important. In terms of the final balance 30 years from now, roughly half of that will probably come from your contributions that you make and half of that expected to come from investment returns from a broadly diversified balanced-type approach. That’s very different than shorter-term investment goals. Let’s say you’re saving for something five years from now, even 10 years from now. In those cases, the breakdown between how much you have to save—the contributions versus how much you might get from investment returns—is much more skewed to like 80% contribution, 90% contribution of your total balance is going to be the amount you save, not the investment return. I think sometimes people don’t realize that. That’s where it’s really important for long periods of time, get it in early, get the compounding, again at least in the expected terms. Half or more of what you will have at the end is likely to be from that investment return piece of it. Though you can’t get the investment returns unless you contribute. That’s why they both work in tandem and that’s why it’s in many ways really encouraging both dimensions from this report. Good contribution rates—they can be a little bit better—but good contribution rates and good investment choices and selection, are setting people up at least on the right path.

Gender Differences in Equity Allocation

Christine Benz: I’ve gotten kind of obsessed with the equity allocations by women versus men, and it’s interesting to observe the changes and looking at this report—the most recent report—showed that women’s average and median equity allocations were right in line with men’s, but it seems like that hasn’t always been the case. So maybe you can talk about what is driving the trend toward men and women assuming similar levels of equity risk. I’m guessing it goes hand in hand with the uptake of target date, but I want to hear from you about that.

Dickson: Absolutely, Christine. It goes to the uptake in target-date funds and the auto-enrollment piece of it because where we see this biggest increase, as I had mentioned earlier, is in those younger ages and I’m going to flip that a little bit, which is to say, where you see the decrease in equity exposure is at the older ages and right now the labor mix, we do see 54% of our sample being male or 55% somewhere in that range, but the characteristics there when we look at labor force evolution, who’s in the labor force at different ages and so forth, you get a bit more of a balance between male and female at those younger ages and that is with the target-date funds and the great increase in equity allocation there, you’re definitely seeing—and I know, Christine, you and I both know about Barber and Odean studies and looking at risk-taking male versus female, trading activity male versus female. By the way, we definitely still see that men trade a little bit more than women in the data, but their overall asset allocation, and if you will, their risk tolerance or risk appetite has definitely converged over the last decade. And you mentioned it, and in fact, the specific numbers if you look at the median equity participant-weighted percentage by gender, it’s 86% equity for both male and female, and then if you just look at the average equity weight, it’s within a percentage point, so it really is showing that and if I drill down one level deeper though, you do see a few differences in how the equity amounts are allocated between men and women in our sample.

In particular, target-date funds are held more by women in terms of the percentage of their allocation. So, for example, the equity piece coming from target-date funds is about 43% of that 76 or 78, if you’re talking about the average or the median. Let’s talk about the average for a moment. So, about more than half is coming from the target-date fund allocation. Whereas for men, it’s a little less than half that comes from the target-date allocation in terms of the total equity exposure. Instead, men tend to hold a bit more in individual diversified equity funds than women do. It’s a little bit at the margin, but in the grand scheme of things in terms of total equity allocation percentage, women tend to take a little bit more advantage of target-date fund investments and that the equity percentages offset, if you will, in terms of how men and women invest so that they end up at the same total number roughly.

Gender Differences in Account Balances

Arnott: Sticking with the theme of gender differences, you show account balances for men and women in the same income range, and women consistently have lower balances across all of these income bands. Do you attribute that to women maybe often having less time in the workforce if they take time off to raise a family or spend a few years working part time, or are there other factors at play between the difference in account balances?

Dickson: Yeah, I think there are a lot of different aspects going on there. Certainly, as you said, the data show that there is a difference in balances. However, in other research that we published and what shows also here is that if you look at things like participation rates and contribution rates, they look very similar by income band, by age when you look at gender differences there. If anything, women have tended to have higher participation rates across all income levels and men have slightly higher savings rates when compared with women, but that’s really just at the lower income levels. If you look at the higher income levels, women if anything have had somewhat higher savings rates, at least in this report.

So, I think it ultimately does come down to one of the biggest differences there is that contribution rates and balances increase with income. So, that caregiving aspect that oftentimes lots of research has shown that women will need to temporarily leave the workforce, whether it’s taking care of parents or children, whether it is reducing their hours or going part time that’s more prevalent there. All of that has an impact on retirement savings over their working careers. So, what we’re seeing with the snapshot at a point in time is current income and current balance. That’s not necessarily capturing these shifts in and out that may be occurring for women in the workplace or the income differences when we look at bands that may have been during the course of one’s career. At least though in holding current income, constant or consistent, you see much less difference in terms of those things like participation rate, contribution rate, and so forth. But it definitely still manifests itself in balance differences throughout the data.